Reading Balance Sheets & Income Statements — Q&A

10-K = annual, audited. 10-Q = quarterly, unaudited. Both are SEC filings stockholders use to inspect company finances.

Also called stockholder’s equity — overall company value from the balance sheet. Net worth = Assets − Liabilities. Example: $525K assets − $250K liabilities = $275K.

Current ratio = $125K/$100K = 1.25 (above 1 = more short-term assets than liabilities). NWC = $125K − $100K = $25,000.

Quick ratio = (Current assets − Inventory) ÷ Current liabilities. ⚠️ Only difference: inventory is subtracted from current assets. Measures liquidity without relying on selling inventory.

Current assets: cash, receivables, inventory. Fixed assets: real estate, equipment (tangible). Intangible: patents, copyrights. Current liabilities: items with “payable” (wages, taxes, interest). Long-term liabilities: bonds, mortgages.

Sales − COGS = Gross profit − operating expenses = EBIT − interest = EBT − taxes = Net income − dividends paid = Retained earnings.

PE = market price ÷ EPS. High PE → may be overpriced; typical of growth companies. Low PE → may be underpriced; typical of value companies. ⚠️ Don’t reverse: Growth = high PE; Value = low PE. Average range often 15–25.

Footnotes to the financial statements provide additional context (e.g., COGS spike due to pandemic safety costs).

Amount investors paid above par value at issuance. Example: $100 par preferred sold at $102 → $2/share goes to capital in excess of par.